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Market Reaction to Bank Liquidity Regulation

Published online by Cambridge University Press:  04 March 2018

Brunella Bruno ,
Enrico Onali  and
Klaus Schaeck
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Abstract

We measure market reactions to announcements concerning liquidity regulation, a key innovation in the Basel framework. Our initial results show that liquidity regulation attracts negative abnormal returns. However, the price responses are less pronounced when coinciding announcements concerning capital regulation are backed out, suggesting that markets do not consider liquidity regulation to be binding. Bank- and country-specific characteristics also matter. Liquid balance sheets and high charter values increase abnormal returns whereas smaller long-term funding mismatches reduce abnormal returns. Banks located in countries with large government debt and tight interbank conditions or with prior domestic liquidity regulation display lower abnormal returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 2 , April 2018 , pp. 899 - 935
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We are grateful to James Barth (the referee), Elena Carletti, Piotr Danisewicz, Giuliano Iannotta, Paul Malatesta (the editor), Rafael Repullo, Andrea Resti, Kasper Roszbach, Rhiannon Sowerbutts, and Jim Steeley for comments on previous drafts.

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